The United States Securities and Exchange Commission (SEC) has recently taken legal action against accounting firm Prager Metis for allegedly violating auditor independence rules while providing services to cryptocurrency exchange FTX. The SEC claims that Prager Metis offered auditing services without maintaining the necessary independence, as it continued to provide accounting services. This practice is not permitted under the auditor independence framework.
The SEC’s complaint states that over the course of approximately three years, Prager Metis failed to uphold fundamental principles in its audits, reviews, and exams. This alleged violation of auditor independence occurred in hundreds of instances during this period, although the SEC’s statement does not specifically mention FTX or any other clients.
However, a court filing from another case sheds light on Prager Metis’ relationship with FTX. According to this filing, FTX engaged Prager Metis to audit its subsidiary FTX US and the parent company FTX in 2021. This becomes significant because FTX later declared bankruptcy in November 2022. The filing argues that since FTX’s former CEO, Sam Bankman-Fried, publicly announced previous audit results, Prager Metis should have recognized that FTX would use their work to build public trust.
Concerns had previously been raised about the credibility of the material presented in FTX’s audit reports. Current FTX CEO John J. Ray III expressed substantial concerns about the information presented in the audited financial statements during a bankruptcy court hearing on January 25. This, coupled with the concerns raised by Senators Elizabeth Warren and Ron Wyden about Prager Metis’ impartiality, further calls into question the firm’s actions.
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In a separate case, U.S.-based law firm Fenwick & West, which provided services to FTX, is also facing allegations regarding its involvement in FTX’s collapse. In a court filing, plaintiffs argue that Fenwick & West exceeded the norm regarding its service offerings to the exchange and should be held partially liable for the exchange’s downfall. Fenwick & West, on the other hand, maintains that it cannot be held responsible for a client’s misconduct as long as its actions fall within the bounds of the client’s representation.
These legal proceedings highlight the importance of auditor independence and the potential consequences when it is compromised. Maintaining independence is crucial to investor protection. By entwining accounting and audit tasks, conflicts of interest can arise, creating a risk of misleading financial reports and damaging investor confidence.
The SEC’s action against Prager Metis serves as a reminder to accounting firms and auditors about the significance of maintaining independence and adhering to professional standards. Firms working with cryptocurrency exchanges and other high-risk ventures must exercise extra diligence in their auditing and accounting practices to ensure accurate and reliable financial reporting.
Overall, these recent developments in the legal proceedings against Prager Metis and Fenwick & West underscore the need for a robust and transparent regulatory framework in the cryptocurrency industry. As the industry continues to evolve and attract more mainstream attention, it is essential for regulators, auditors, and legal professionals to remain vigilant in safeguarding investor interests and maintaining the integrity of financial reporting.
